Macro Research

US: Downgrading to 2.5 stars “Neutral” amid an escalating trade war

An "America First" policy is weighing on the US economy and equities, but key sectors continue to offer promising opportunities for investors.

Joel Phua
|
Published on 29 Mar 2025

US: Downgrading to 2.5 stars “Neutral” amid an escalating trade war | Open a FREE FSMOne account and manage all your investments conveniently in ONE place

• After an exceptional 2024, US equities have underperformed their global peers year-to-date, as escalating trade tensions and recessionary fears weighed on the market.

• The US is shifting towards a more transactional foreign policy, accepting greater economic disruption in pursuit of long-term growth. This "America First" strategy is putting a strain on the economy and increasing the likelihood of a recession.

• Sectors including industrials, materials, consumer staples, consumer discretionary, and energy, are particularly vulnerable to the impact of Trump’s tariffs.

• Despite broader market risks, digital economy and semiconductor stocks are well-positioned for long-term growth. Strong AI demand and dominant market positions render these companies more resilient to tariffs.

• We are downgrading the US from 3.0 Stars “Attractive” to 2.5 Stars “Neutral”, in view of heightened uncertainty and weakening growth prospects.

• Nonetheless, we believe US exceptionalism remains intact, and that the stock market could rebound with potential positive developments, including tax cuts and deregulation.

US equities have underperformed their global peers year-to-date, as an escalating trade war raises the odds of a recession (Figure 1). The S&P 500 index entered a correction on 13 March, wiping out post-election gains that had been fueled by optimism over US President Donald Trump’s pro-growth policies such as tax cuts and deregulation. With trade policy uncertainty persisting and the risk of an economic downturn rising, we believe investors ought to reassess their exposure to the US markets.

Figure 1: US equities have lagged their peers year-to-date

“America First” policy to weigh on growth, raising recession risks

When Trump proposed 10-20% universal tariffs and 60% tariff on China during his re-election campaign, many dismissed it as an empty threat and believed that he will use tariffs as solely as a negotiating tool. As it turns out, tariffs are a central part of his vision to “Make America Great Again”. He sees tariffs not just as a revenue source or a tool to boost US manufacturing, protect jobs, and reduce the nation’s trade deficit, but also a means to tackle non-trade issues like illegal immigration and drug trafficking. Under Trump, the US appears to have shifted toward a more transactional approach to international relations, where might trumps diplomacy. This is evident in its aggressive tariffs not just against China, but also long-standing trade partners like Canada and Mexico (Table 1).

Table 1: Tariffs imposed thus far by the Trump administration

Effective Date	Target Countries	Tariff rate	Goods Targeted	Retaliation
4 Feb 2025	China	10%	All	10% tariffs on US crude oil, agricultural machinery, large-displacement vehicles and pick-up trucks 15% tariff on US coal and liquefied natural gas Antitrust probe in Google
4 Mar 2025	China	Additional 10%	All	10-15% tariffs on US agriculture exports (~USD 21bn worth) Placed 15 US companies onto its Export Control List and 10 US companies to its Unreliable Entity List
4 Mar 2025	Canada, Mexico	25%; 10% for Canadian energy	USMCA noncompliant goods from 7 March 7 (all goods from 4–6 March)	Canada imposed 25% tariff on CAD 30bn worth of US goods
12 Mar 2025	All	25%	Steel & aluminum	EU to impose counter tariffs on €26 billion worth of US goods in mid-April Canada imposed 25% tariff on CAD 29.8bn worth of US goods
24 March 2025	Importers of Venezuela oil & gas	25%	All	Undetermined
2 April 2025	EU	25%	All	Threatened
3 April 2025	All	25%	Autos	Undetermined
Source: Bloomberg, iFAST compilations. Data as of 27 March 2025

Trump has also demonstrated a surprising willingness to tolerate an economic slowdown to pursue his protectionist agenda. When asked about the possibility of a recession, Trump said, “Look, we’re going to have disruption, but we’re OK with that.” Commerce Secretary Howard Lutnick also said that Trump’s policies are “worth it” even if they lead to a recession. This stands in stark contrast to Trump’s first term, when he often used stock market performance as a barometer of his success as president.

At present, the US economy remains resilient, supported by a healthy labor market. Unemployment remains low at 4.1%, while real wages continue to grow. Consumer demand is also holding up, with retail sales rising 0.2% month-on-month in February, rebounding from a 1.2% decline in January. Overall, the market still expects GDP growth in the coming quarters to be positive (Figure 2).

Figure 2: Consensus estimates of GDP growth are rather optimistic

However, as the US shifts towards a more transactional foreign policy and displays a greater tolerance for economic disruption in pursuit of long-term growth, we expect Trump’s tariff policy to remain aggressive. The US president is set to announce reciprocal tariffs on 2 April, “Liberation Day”, against countries with high trade barriers and persistent trade imbalances with the US, while sector-specific tariffs, including those on lumber, semiconductors, and pharmaceutical drugs, are likely to be introduced later. If the US were to expand its 25% tariffs on its two largest trading partners – Canda and Mexico – to cover all goods, it would severely disrupt one of the world’s most integrated supply chains. Needless to say, retaliation from US’ trade partners will further disrupt global supply chains and stifle economic growth. Trump has already warned that “large-scale tariffs, far larger than currently planned” will be imposed on the European Union and Canada if they worked together to do economic harm to the US.

Taken together, the series of upcoming tariffs and retaliations may lead to further downward revisions in economic growth, with the possibility of a recession. Tariffs not only lead to higher prices, which undermine consumption, but also pose upside risks to inflation, potentially limiting the Fed’s ability to lower rates. Furthermore, the constantly changing nature of tariffs has also created significant uncertainty for businesses around the world, hindering their ability to make investments that can drive economic growth.

Certain sectors could be hit hard by Trump’s tariffs

Although no sector will be completely immune to the effects of Trump’s tariffs, some are more vulnerable than others. This is reflected in the uneven earnings downgrades across S&P 500 sectors, with some experiencing sharper declines than others (Figure 3).

Figure 3: Certain sectors have seen substantial earnings downgrades

a) Industrials and materials

Reindustralising America could potentially create many jobs and help address trade imbalances, but the manufacturing industry will likely suffer in the near to medium term. Building domestic capacity will take years, and in the interim, the rising cost of importing raw materials for production will squeeze profit margins. Furthermore, firms are unlikely to commit to building costly factories when trade policies could shift at any time. Retaliatory tariffs will also reduce the attractiveness of US exports and the resulting drop in demand could force companies to lay off workers.

Automakers, in particular, will be hit hard as Trump has announced a 25% tariff on auto imports, effective 3 April. The tariffs will apply to both fully assembled cars and key automobile parts, including engines, transmissions, powertrain components, and electrical systems, with those on parts taking effect by 3 May.

In response, Ontario Premier Doug Ford has indicated that retaliation against American cars is almost certain, while Japanese Prime Minister Shigeru Ishiba has not ruled out similar countermeasures.

Overall, these tariffs are likely to drive up costs and reduce vehicle demand for US automakers like Ford and General Motors.

b) Consumer staples and consumer discretionary

Traditionally seen as a safe haven in times of economic uncertainty, consumer staples stocks are not shielded from tariffs either.

Retailers like Target and Best Buy have warned of price hikes, despite efforts to negotiate with suppliers to keep costs down. Even retail giant Walmart, with its significant bargaining power, may find it challenging to maintain prices as it faces pushback from the Chinese government for pressuring Chinese suppliers to absorb the costs of Trump’s tariffs. Higher prices could dampen consumer demand, particularly among lower-income households already struggling with dwindling savings and rising debt. On the other hand, if retailers absorb these cost increases to keep prices stable, their profit margins will take a hit. Either way, retailers face difficult trade-offs in navigating the impact of tariffs.

High-income households, which have played an outsize role in supporting US consumption, may cut back on discretionary spending should the stock market remain weak. This is due to a reduced sense of wealth —essentially the reverse of the “wealth effect”—where falling asset values make consumers feel less financially secure, prompting them to scale down non-essential purchases. As a result, consumer discretionary companies could face increased pressure.

c) Energy

Canada and Mexico supply over 70% of the US’ crude oil imports, with Canada alone accounting for nearly 60%. As this oil is refined in US refineries to produce gasoline and diesel, tariffs on crude oil could lead to higher petrol prices for consumers or reduced profit margins for energy companies. Additionally, China, Mexico, and Canada together account for roughly 30% of US petroleum exports. Retaliatory tariffs, like those imposed by China, could negatively impact the demand for US oil.

US tariffs on steel and aluminum imports will also impact US energy companies as they are essential for key infrastructure such as drilling rigs, storage tanks, pipelines, as well as windmills and solar panels.

Staying positive on digital economy and semiconductor stocks

Fortunately, it is not all gloom and doom. There are still sectors in the US that we believe will thrive in the long run, regardless of tariffs —specifically the digital economy and semiconductor sectors. These sectors are well-positioned to capitalise on the structural megatrends of AI and digitalisation, which we expect to drive solid earnings growth in the years ahead. In fact, as illustrated in Figure 3, the S&P 500’s Information Technology and Communication Services sectors are projected to lead earnings growth in 2025, with strong double-digit increases. This growth is set to build on solid fourth-quarter earnings in the tech sector, where companies reported sustained, strong demand for AI.

While tariffs on these sectors are certainly possible, Big Tech companies and leading chipmakers dominate their markets, making their products and services virtually irreplaceable. This gives them significant pricing power and helps ensure steady demand, even in the face of tariffs.

Furthermore, despite uncertainties associated with Trump’s policies weighing on the recent valuation of the semiconductor sector, as well as downward revisions to its future earnings growth since 20 January (Trump’s inauguration), we believe the recent sell-offs in chip stocks are primarily sentiment-driven and the earnings forecast of the MVIS US Semiconductor Index (MVSMHTR Index) remains robust. We stand by our belief that, with the AI race shifting from training to inferencing progress, tech players will continue injecting CAPEX (whether ASIC or GPU) to advance their AI models to capture initial market share. Not to mention, we are currently in the midst of a semiconductor upcycle, and the fundamentals of the largest components of the MVSMHTR Index (i.e. Nvidia, TSMC, ASML) remain strong. We believe big semiconductor players are well-positioned to ride out the storm and remain the biggest drivers of the index in the long run.

That said, the tech sector will not be immune to any short-term selloffs, and prices could decline further. However, significant pullbacks should be seen as opportunities for investors to increase their exposure.

Downside risks and heightened uncertainty warrant a downgrade

Given escalating trade tensions, the unpredictability of Trump’s tariffs, and the growing risk of an economic slowdown, we have downgraded our rating for the U.S. from 3.0 Stars “Attractive” to 2.5 Stars “Neutral.” The prospect of further tariff actions, combined with Trump’s diminished incentive to appease voters in his final term, adds further uncertainty to the economic outlook. Consequently, we have revised our earnings projections for 2025 and 2026 downward.

Applying a fair PE multiple of 22X to our downwardly revised 2026 earnings forecast, we arrive at a target price of 6,500 for the S&P 500 index, representing an upside potential of approximately 14%.

While we have adopted a more cautious stance on the U.S. market, we do not rule out the possibility of a rebound should positive developments emerge. Pro-growth factors such as deregulation and tax cuts have yet to be implemented, and a truce between Ukraine and Russia could help improve market sentiment.

Furthermore, we continue to believe that US exceptionalism remains intact over the long term. The US maintains several key advantages over global peers, including the world’s largest and most liquid capital markets, dollar dominance, and a strong concentration of high-quality, industry-leading companies.

To navigate the current market volatility, investors can consider gaining exposure to high-quality U.S. companies through the JPMorgan U.S. Quality Factor ETF (NYSE: JQUA). For broad-based exposure to the tech sector, options include the Fidelity Global Technology A-ACC-USD, Eastspring Investments Unit Trusts – Global Technology SGD, and the Invesco NASDAQ Internet ETF (NASDAQ: PNQI). Meanwhile, those looking to invest specifically in the semiconductor industry may look to the VanEck Semiconductor ETF (NASDAQ: SMH).

With the downgrade of the US, other markets have become more attractive. We remain positive on Japan, and are increasingly seeing China in a more positive light. Its economic challenges are already well-known, and the government is now focused on reversing the damage done to the private sector over the past few years. With expectations already low, any positive news from China could act as a strong catalyst for the market.

Europe is also another market worth considering, particularly its defence industry. Trump’s abandonment of the transatlantic alliance, which has long been a cornerstone of European security, has prompted a significant increase in defense budgets both at the EU level and in individual countries.

Table 2: Projections for the S&P 500 Index

S&P 500 Index	2023	2024E	2025E	2026E
Earnings Per Share (EPS)	221.57	237.06	263.14	295.24
Earnings Growth YoY	-1.0%	7.0%	11.0%	12.3%
PE Ratio (X)	25.70	24.02	21.64	19.27
Target Price (based on a fair PE of 22X)				6,500
Upside Potential				14.1%
Source: Bloomberg Finance L.P., iFAST Compilations. Data as of 27 March 2025

Figure 4: Share prices are driven by earnings growth in the long run

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US: Downgrading to 2.5 stars “Neutral” amid an escalating trade war

Joel Phua

Published on 29 Mar 2025

Figure 1: US equities have lagged their peers year-to-date

“America First” policy to weigh on growth, raising recession risks

Table 1: Tariffs imposed thus far by the Trump administration

Figure 2: Consensus estimates of GDP growth are rather optimistic

Certain sectors could be hit hard by Trump’s tariffs

Figure 3: Certain sectors have seen substantial earnings downgrades

Staying positive on digital economy and semiconductor stocks

Downside risks and heightened uncertainty warrant a downgrade

Table 2: Projections for the S&P 500 Index

Figure 4: Share prices are driven by earnings growth in the long run

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US: Downgrading to 2.5 stars “Neutral” amid an escalating trade war

Joel Phua

Published on 29 Mar 2025

Figure 1: US equities have lagged their peers year-to-date

“America First” policy to weigh on growth, raising recession risks

Table 1: Tariffs imposed thus far by the Trump administration

Figure 2: Consensus estimates of GDP growth are rather optimistic

Certain sectors could be hit hard by Trump’s tariffs

Figure 3: Certain sectors have seen substantial earnings downgrades

Staying positive on digital economy and semiconductor stocks

Downside risks and heightened uncertainty warrant a downgrade

Table 2: Projections for the S&P 500 Index

Figure 4: Share prices are driven by earnings growth in the long run

Ways to Invest with FSM Global

Don't have an account with us?

Need Financial Advice?

Latest Articles More

more.articles More

Live Chat 8:30am to 10:30pm, (Mondays to Fridays excluding PH) and 8:30am to 12:30pm, (Saturdays excluding PH)

Select Country/Region

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8:30am to 10:30pm, (Mondays to Fridays excluding PH) and
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